Q2 2021 Enerflex Ltd Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to city and it's like second.
Second quarter, 2021, and resolve Hudson Com.
At this time all participants are in a listen only net after the speaker's presentation, there will be a question and answer session.
Ask a question during the session you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star and Sierra I would now like to hand, the conference over to your Speaker, Mr. Stefan Ali Vice President strategy and Investor Relations.
Please go ahead.
Thank you operator, and good morning, everyone here with me on Marc Rossiter, and or Flex as President and Chief Executive Officer, Sundry. Additionally, and our flex as senior Vice President and Chief Financial Officer, and Ben Park, and our Black Senior Vice President.
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During this call, we'll be providing our financial results for the 3 months ended June 32021, a brief commentary on the performance of our 3 business segments, and a summary of our financial position.
Today's discussion will include forward looking statements regarding and or flex as expectations for future performance and business prospects.
Forward looking information involves risks and uncertainties and the stated expectations could differ materially from actual results for performance.
For more information please see the advisory comments within our news release M DNA and other regulatory filings and approximately 1 hour. Following the completion of this call a recording will be available on our website under the investors section.
During this call unless otherwise stated we'll be referring to the 3 months ended June 32021, compared to the same period of 2020.
We'll proceed on the basis that you've all taken the opportunity to read yesterday's press release, I'll now turn the call over to Mark.
Thanks, Stephen and good morning, everyone.
At this time last year W. T. I was recovering from negative territory on natural gas was near all time lows.
Fast forward, a year and commodity prices have staged and incredible rebound as the global economy recovers.
Oil is seeing its highest price since 2018 steadying around $70 a barrel for both Henry hub and eco gas prices are respectively, hovering near $4 their highest price and 5 years.
Underpinned by increased fuel switching industrial use and power demand.
In addition rig counts are increasing at a healthy pace up over 100%. Since this time last year with additional increases expected through 2 year and.
This tailwind for the industry resulted and enter flex delivering solid second quarter results across all regions and business lines.
Benefiting our results were stronger contributions from our asset ownership platform for utilization of our U S contract compression fleet improved to a second quarter average of 8.5% well.
Exiting the quarter at 88%.
Illustrating the resilience of these investments and meeting our expectations of stronger utilization as commodity prices rebounded and production returned to the market.
U S gas production is approximately 93 Bcf per day, which is nearing 2019 average of 95 Bcf per day.
And is concentrated in locations such as the Permian basin, which is well suited to the configuration of inner flex asleep.
Our contract compression business has been further supported by exercising patience in deploying large horsepower to ensure favorable contracts, including with respect to duration and pricing.
We've also witnessed increasing demand for electrified rental compression as our customers turned our minds to managing their environmental impact and reducing scope 1 emissions.
In fact over half of our 2021 contract compression build schedule is dedicated toward electric compression.
We expect that demand for E compression will continue to strengthen and geographies, where it can be readily deployed as clients continue prioritizing their decarbonization efforts.
In addition to our contract compression fleet, our international boom assets continue their strong performance across all geographies.
We are progressing that 10 year boom project book during the first quarter of 2021 and <unk>.
Have line of sight to several other 10 year boom opportunities in our rest of world segment that would be underpinned by take or pay contracts with strong counterparties.
As we've stated before provided that our expectations for strengthening engineered systems bookings activity come to fruition, we're prepared to deploy additional capital this year toward accretive asset ownership opportunities that can further contribute to the stability and predictability of our earnings profile.
Consequently, very meaningful to us is the increase and engineered systems backlog for the second consecutive quarter books.
Bookings of over 154 million represent the highest bookings quarter since the first quarter of 2020 and are reflective of improved macro indicators for oil and gas demand and strengthening balance sheets across the sector.
As stated in our last earnings call, we anticipated bookings improvement to occur this year given the rapid increase in rig counts, which are bookings typically lag by roughly 6 to 8 months.
While bookings activity accelerated near the end of the second quarter, our outlook for the remainder of the year remains unchanged in that we expect the second half of 2021 to show stronger bookings activity and the first half.
Notably bookings activity is roughly.
Allocable and third by and destination.
<unk> optimism for a broad based recovery.
While some regions may recover faster than others, our geographically diversified platform ensures we're positioned to participate wherever activities focused.
We're also happy to see recent bookings more heavily concentrated towards gas processing applications versus compression with demand coming from each of the upstream midstream and petrochemical sectors. We have dedicated resources over the years to increasing our capabilities and expertise and complex gas processing applications and are proud that our rep.
Mutation for successfully delivering has assisted us and securing additional gas processing projects. This year.
Our aftermarket services business was stable through the quarter recovering from the prior quarter seasonality and weather induced weakness and.
Recovery for the EMS business will likely take several quarters, but we do expect a gradual return of activity as the year progresses.
Turning to our energy transition efforts, we have completed significant work and deepening our understanding of how the transition might unfold and are already seeing significant number of inquiries for lower carbon solutions and.
Including in respect of <unk> compression, where we're currently bidding several opportunities.
And other constructive discussions regarding carbon capture and sequestration biofuels and renewable natural gas and hydrogen.
With rig counts, increasing economies reopening and supportive demand dynamics for both oil and gas and certain energy transitions solutions for.
We're optimistic that the industry is turning the corner and are focusing our attention towards supporting our global customers and their development plans, while simultaneously building capabilities to capture opportunities within the energy transition landscape.
Lastly, I would like to once again, thank and reflects as employees for their devotion and commitment through this downturn. This has been 1 of the most turbulent periods for the oil and gas industry, which we can only navigate because of the talents of our hard working dedicated team as.
As we return to in person collaboration the future looks bright for <unk>, and we're well positioned to continue participating in the industry's recovery.
I will now turn things over to Sanjay to review our financial results.
Thanks Mark.
Second quarter revenue of 205 million decreased versus the prior year period, due primarily to lower engineered systems revenue on lower opening backlog and reduced contribution from some major projects that were largely completed by the third quarter of 2020.
Despite lower engineered systems revenue book.
<unk> of $155 million improved our backlog by over 80% relative to December 31, 2020, reflecting the improving conditions for the oil and gas industry and for engineered systems business.
Both service revenue and rental revenue were in line with the comparable period as the industry activity improved off the lows seen in the preceding quarter.
Rentals continued to benefit from the improved utilization of our USA contract compression fleet and contributions from our growing portfolio of international boom assets. Despite a weaker U S dollar negatively impacting revenue and many of our operating regions.
Gross margins decreased over the comparative quarter on lower revenue, but the decrease was partially offset by increased contributions from recurring revenue product lines, which yield a higher gross margin as a percent of revenue.
Overall gross margin as a percent of revenue increase.
SG&A decreased versus the comparative period, driven by lower compensation expense cost recoveries related to government assistance programs and the absence of bad debt provision that were taken in the second quarter of 2020.
And and flex remains disciplined in managing working capital.
Remaining direct material inventories will be realized into engineered systems projects and new contract compression units over time, including as part of projects booked during the quarter as.
As business activity increases, we expect to manage our talent shop capacity and supply chain to capitalize on any uptick while continuing to balance working capital across each of our regions.
During the quarter, we invested $12.5 million of capital towards units in our U S rental fleet.
Which has grown to approximately 380000 horsepower.
From a capital allocation perspective, we are seeing several opportunities to deploy capital globally at attractive returns and with our Counterparties.
With whom we have deep relationships.
We have a current opportunity set exceeding $100 million and improved outlook for engineered systems bookings and our balance sheet strength, we expect to pursue additional asset ownership investments.
Through to year and funded through a combination of cash on hand and debt.
However, we will maintain a conservative leverage position, having exited the quarter with the bank adjusted net debt to EBITDA of 1.18 times compared to a maximum ratio of 3 to 1.
This bank adjusted net debt to EBITDA ratio relates specifically to the company's bank facilities and notes and excludes the new non recourse credit facility, which had approximately $43 million drawn on June 30.
With significant liquidity on our revolver and the possibility that engineered systems activity could pick up and and flex and is well positioned to consider additional growth capex as attractive opportunities present themselves.
Our net debt decreased by over 150 million versus June 30th 2020 as we continue to use cash to decrease net leverage and strengthen our balance sheet.
With respect to liquidity and reflects has $99 million of cash on hand.
Using cash during the quarter for more substantial repayments of long term debt.
In addition, we have access to $685 million on our bank facility, giving us significant flexibility to manage our resources as the industry recovers and to consider organic and or inorganic growth.
Lastly, and reflects board will continue to evaluate dividend payments on a quarterly basis based on the availability of cash flow and anticipated market conditions.
Yesterday, declaring a dividend of <unk> <unk> per share to be paid on October 7.2021.
This completes the formal component of the webcast additional details can be found on our August 4th press release, we will now be happy to take any questions.
Thank you as a reminder to ask a question you will need to press star 1 on your telephone and withdraw your question. Please press the pound.
Standby, while we compile the Q&A roster.
Our first question will come from Michael Robertson with National Bank Financial. Please go ahead.
Hey, good morning, Congrats on a solid quarter and thanks for taking my questions.
Posted a really impressive margins and the quarter driven by what appears to be a combination of revenue mix and SG&A savings.
And with bookings picking up for engineered systems I was wondering what kind of capacity do you have right now to absorb additional activity with your sort of current head count and should we expect a similar level of SG&A moving forward or are you anticipating more of a ramp up as that segment recovers.
Michael This is Marc Rossiter, thanks for the question.
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On a lot of work.
And probably the last 2 or 3 quarters thinking about our human capital and making sure that we have the appropriate human capital to take advantage of the ramp up and activity in our sector. So we're.
Yeah.
Got to people.
And that we need to do I don't think that Youll see a meaningful change in our SG&A as a percentage of revenue that and if you go back a number of years into the ups and downs of the business, but it's hard for us to predict quarter by quarter, where it's going to be.
Fair enough.
Helpful color.
And in that vein.
Given the expected pickup and engineered systems activity and the inflationary pressures, we're seeing and the cost of.
Raw materials and labor.
Are you at a point, where you're facing some headwinds on input prices or are you able to avoid the bulk of that at least in the near term by continuing to chip away at our existing inventory.
Yes, good morning, Michael This is Sanjay.
I would say that we've been able to manage the inflationary pressures that we've seen and the supply chain so far.
And through US as you mentioned, our inventory, which has been coming down but.
But at the same time also just being able to pass.
Pass it along to the market.
We feel like we've been able to manage those pressures today.
Based on what Youre seeing today, how much more runway do you think you have in that regard before you would be encountering a lot more on.
A more significant increases and input costs.
Yes, Michael this is mark.
We worked very closely with our supply chain, obviously, and we understand the price increases that theyre going to bring to us with enough advance notice to deal with those numbers with our customers. So like Sanjay said, we do have some inventory that's obviously at old prices and we chip away at that but really.
The bulk of the new orders and the costs are going to be new things, we have to buy to fulfill the orders and as we estimate those things, it's very much and real time sort of Bang Bang stuff to make sure that we've got the right input costs.
Got it well that listen and that's really helpful color I will jump back in the queue. Thanks, a lot for taking my question.
Thank you. Our next question will come from Aaron Macneil with TD Securities. Please go ahead.
Hey, good morning, and al Thanks for taking my questions.
And you guys mentioned in your prepared remarks that youre seeing several opportunities for boom projects internationally that in aggregate.
So more than 100 million Bucks.
Can you sort of frame the opportunity a bit more in terms of.
And number of projects and potential timeline to award or spending and as you mentioned as well on your prepared remarks.
And your time.
Increased capex to higher bookings activity. So I'm wondering is there any read through implications for the remainder of your 2012 and capital program.
Aaron This is Marc I'll talk about the opportunity and I'll ask Sanjay to give you an update on the capex for the year debt.
The opportunity set for boom is what it's always been it's international it's 5 to 10 year.
M <unk>.
Take or pay contracts, it's compressor stations gas plants natural gas infrastructure.
Projects can be anywhere from $50 million to $150 million over the years that sort of and the brackets of the projects. We do I wouldnt want to get into the number of projects or the value of each 1 today.
And what I would like to let you know is is that the pipeline of new opportunities is quite solid for those investments and it's business that we like it provides above average return and it's a real priority for the people and the international segment.
Yeah and I'll take.
Your question on the capital.
Capital budget for 2021.
We gave some guidance $50 million to $100 million and growth capital and I say that we are.
Still firmly within those guardrails and given the given the pipeline I would expect that we're going to come out.
Towards the higher end of the range there by the end of the year, but also.
We're getting to the point and the year, where even if we kept kickoff projects now.
Not a whole lot of time to get down.
The spending curve, if you will on new projects. So.
Right now, we still think that range that we gave earlier and the year is a good good range, but I do think we're going to be towards the upper end of it.
Got it okay.
Sticking with the capital discipline theme.
And understanding that it's on board decision and Nike.
And say, hey, but historically under flex with Q3 has evaluated the dividend.
Instead of asking you about the dividend specifically, maybe you could give us a sense of higher you currently ranked the dividend versus other capital allocation priorities.
Growth Capex, M&A, including potential acquisitions to bolster your energy transition and ambitions and debt repayment or and in CIB.
Yes sure.
And so.
And I'd say that our priorities and it stayed very consistent.
And it's.
As you know number 1 priority has always been about maintaining a healthy balance sheet and that's that's priority number 1.
We are seeing really good growth opportunities as we just mentioned and as Mark just talked through.
So thats certainly our second priority.
And then I think.
The dividend would.
And sort of followed behind that but.
And I appreciate your kind of are you asking the question and the way that you did like that that's a very much of a board discussion and we have every quarter and.
We sort of look at all the all the factors before before making the decision for each quarter.
Understood and last question for me.
Just on margins I assume theres a lot of idle capacity.
Among your peers in terms of the manufacturing capacity and maybe could you talk about the competitive environment for your recent bookings and potential future bookings and obviously you also mentioned that GAAP to gas processing.
For your bookings were heavily weighted to gas processing, which I think historically at a higher margin, but should we temper margin expectations going forward as you can.
Got it.
Incremental bookings to the backlog.
Aaron This is mark I think it would be smart to temper those expectations, especially for compression bookings. There is a lot of a lot of great competition, and the compression packaging and service space and although we're very happy with the quarter that we've had.
It's still early and the recovery. So I would stay there is there is still more hunger out there than we would like and it may take a little while for margins to meaningfully change within that sector gas processing is slightly different but we still have a lot of great competition and the gas processing business.
So, yes, I think it would be smart to temper expectations for hard snapback and margins.
Are you staying maybe I'll sneak 1 more and are you seeing pretty firm on on how youre bidding things and the margin expectations do you have or.
Are you trying to fill the <unk>.
Facilities as well.
And I'd, rather not go into that too much but we the.
1 of the key skill sets for our management teams in those big Es businesses of the United States and Canada is really looking at all those opportunities and looking at the risks of executing them and deciding on a margin thats appropriate for the customers the jobs the competitive environment.
It's really a day to day analysis that the teams do to try to maximize margin at all times and the empty capacity amongst our competitors is a really big part of that that math. So as long as we're at the early stages of the recovery there is going to be a lot of competitive pressures no doubt.
Understood. Thanks for taking my questions I'll turn it over.
Thank you. Our next question will come from coal per <unk> with Stifel. Please go ahead.
Good morning, everyone.
Just wanted to start with the U S bookings number it was obviously very strong can you just comment.
And if there were any energy transition projects and there or does that still remain more of a 2022.2023 story.
There is it's more of a 2022.2023 story.
Energy transition for us.
I would say very active in the inquiry to order pipeline for energy transition businesses.
And in Biofuels, and carbon capture and and hydrogen and compression those sort of for areas that we mentioned more and the pipeline then and the backlog.
Okay, perfect. Thanks, and apologies my line cut out so apologies, if I and my re asking but.
Thinking about the additional asset ownership opportunities can you just comment on how we should be thinking about and reflects allocating capital between boom assets and contract compression.
I don't think we've ever given a percentage that we want to send here and percentage we send there.
We really like our U S contract compression fleet performance through the pandemic and we're going to put an appropriate amount of growth capital into that business. The boom projects that we mentioned are and the pipeline are very interesting to us as well. So we don't go into a ton of details about which 1 sort of gets more money.
No that's that's totally fair and I.
Thinking about Canada. It has historically been a smaller piece of the es business, but with a strong activity outlook and in particular strong natural gas prices do you see it becoming a bit more of a contributor and are you happy with your current footprint and the region.
I'm more optimistic about the outlook for engineered systems and Ams.
In Canada today than I have been maybe for the last 3 or 4 years.
Are the customers and Canada are.
And they've gone through a tough period, they've got their balance sheet squared away and they've got they've got their over and start away.
The gas prices they are realizing in the WCS <unk> are healthier than they had been for a long time and so the discussions we're having clients are really positive and I'm very happy with our footprint in Canada, and and not just the shop, but are people. We've worked really hard to make sure we have prioritized keeping the human cap.
Little that we really need to serve our customers going forward. That's the engineers that understand gas processing and compression carbon capture and electric compression all those things that our Canadian customers are engaging with us today, So I am optimistic about the outlook.
We've got the people on the shop that we need to capitalize on what I think will be a healthy.
3 to 5 maybe even longer upcycle and the Canadian market.
Okay, Great and just 1 last 1 for me.
And as activity continues to increase are you concerned at all about labor availability and North America.
We are for sure.
On the labor like labor so for hourly employees.
Good field technicians are always a very hot commodity and our quarter our success and so we've been paying attention to the labor market is really for the last 6 months as we've seen the macro pickup upstream and the rig counts increase and gas and oil prices increase we knew the day was coming debt our field service people.
<unk> and our shops, so we'd get busier. So we've been as proactive as we can be to make sure that we have the best talent strategy as possible.
Okay, Great. That's helpful. Thanks, I'll turn it back.
Thank you as a reminder, ladies and gentlemen, if you would like to ask a question.
Please press the Star then 1 for our next question will come from Tien Monticello with Keybanc capital markets. Please go ahead.
Hey, good morning, guys.
Most of the questions have been answered, but I was just curious about I guess lead times.
A lot of commentary in the market from your peers on the U S, especially about.
Cat engines and delays to get those.
And you get your inventory levels are still pretty high do you think that that's going to be a headwind on deliveries for the new bookings you are getting a second half of the year and what are the lead times look like today.
I don't know, Tim it very well could be a headwind.
We'll have to see.
And what happens from that point of view.
I'm not feeling that it's going to be a really acute significant impact on our engineered systems business. Our lead times today are and the 20, plus week range and Caterpillar and Ariel 2 of our main suppliers Waukesha and other key supplier.
They are.
Looking very closely at their supply chains, and trying to ramp up and again, we're still at the early phases of this so I'm not that concerned about it today.
Okay is your inventory have a significant piece of it there would be those critical components.
For sure.
Okay and.
We're working on it.
A lot of that inventory.
Will be reduced in the coming quarters based on the big bookings quarter, we had.
Okay got it.
And then just on I guess geographical basis.
The commentary coming into the quarter I would've expected.
U S probably not to be as strong as it wasn't and.
And and you just talking about how strong the outlook is for Canada.
How would you rank those.
All 3 markets in terms of current activity levels in terms of I guess bookings inquiries.
Yes, the bookings in the quarter were very close to a third a third a third between Canada, the United States and.
And rest of world and.
So that's pretty broad based pretty evenly split.
And the pipeline of opportunities are equally positive and all 3 regions. The engineered systems opportunity set and Canada, United States are both very healthy.
And in the U S. It's multiple basins.
Around the country and candidates almost all Montney shale business and international a lot of the activity level is really based on approved projects.
And the rest of World segment. So it's broad based we're really happy with what we're seeing and all the regions.
Okay.
And then just the last 1 from me just on the other fee transition conversations that you're having.
Are these typical counterparties for you or are these mostly E&P and midstream companies that youre talking to or are you getting a more broad based industrial.
And client base coming to you.
Tim what were what really I'm excited about and energy transition is the fact that we're talking to both existing customers that we have great relationships with and brand new customers that we didn't really know before there are industrial users and the post and pre combustion space for carbon capture.
When we look at Biofuels, that's a lot of new customers. When we look at other carbon capture utilization and storage projects, we're working really closely with traditional E&P customers and midstream customers in Canada, and the United States. So it's really it's like 3 dimensional the number of folks and projects and ways. We're looking at the <unk>.
Different projects.
It's really exciting and frankly I mean, we've got.
Over 30 carbon capture opportunities. We're currently looking at and various stages and those are and the United States or in Canada with midstream companies are with E&P companies, there with industrial company. So it's a.
It's a lot of on the stuff, we see coming into the pipeline right now.
And I guess on 1.1 more question here just to follow on.
What's the typical size of those projects.
There is a size that would be great for modular as Asian, and the tons per day number I don't have at the top of my head, but a lot of the work we've been doing with the energy transition team over the last 6 months is saying listen we're to our modular equipment, where does that expertise.
Best applied to carbon capture and storage and not surprisingly it covers a pretty big percentage of all the capture opportunities that are out there would be well solved with the modular solution. We have a number that sort of modules modular solutions are really appropriate up to and ex ton per annum capture.
Facility I, just don't have that but it's a big percentage of the overall opportunity set.
Okay got it thanks, a lot and I'll turn it back.
Thank you I'm showing no further questions from the queue. At this time I would now like to turn the call back over to Mr. Marc Rossiter for any closing remarks.
Well, thank you operator.
Since there are no further questions I would like to once again, thank you for joining us on the call and we look forward to giving you our second quarter results in November.
Third quarter results in November.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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